Last updated August 8, 2016 Have you been wondering how much an API would cost if you put a dollar figure on it? That’s been an important question especially for investors since many startups now offer APIs as their core product. We found an interesting way to calculate the value of an API, but by no means is it the end all be all equation.
It’s well known that APIs make companies more efficient, more innovative, and more able to meet the needs of increasingly demanding customers. And it’s also well known that a number of companies are using APIs as a revenue stream. As our Connectivity Benchmark Report showed, 50 percent of large companies (10,000 employees or more) are making more than 10 million dollars in annual revenue from APIs. But is there a way to calculate the actual value of a particular API?
Joe McKendrick of Forbes, with whom we collaborated on a report on the value of APIs to the new enterprise, notes that developing an API strategy adds functionality, increases agility, and decreases operating costs. “The impact of APIs on operations and go-to-market strategy is significant,” he says. “Using APIs to tap into existing functions offered by third parties – such as Google Maps or Salesforce analytics – provides new forms of functionality, as well as a way to cut the costs of maintaining or writing software.”
But we may be able to get more specific than that. CIO.com’s Thor Olavsrud reported on a formula to determine the actual value of any API, which goes as follows:
API worth = Number of users/10,000 x (Number of dev hours x dev hourly cost), with the entire result divided by the number of competitors +1.
So an API with 100,000 users, which took 500 hours to build by two developers earning $50 an hour, and meeting five competitors in the same space, would have a value of about $83,000.
$83,333 API value = ((100,000/10,000) x (1000 x 50))/5 +1
This calculation is helpful when determining the budget of API development. In many cases, the benefits that could come from an API – in improved customer experience, new revenue streams, or increased efficiency – more than pay for the initial development outlay.
For more about developing APIs that could benefit your business, take a look at our resources on the Secrets of a Great API.